Wednesday, June 30, 2004

Yesterday I had the pleasure of sitting on a panel at the Informa Media Group's seminar "Profiting from On-Demand TV." I couldn't help but feel that I had something in common with the incumbent telcos grappling with entry into this market - I was a latecomer to the panel and was in largely unfamiliar territory! The organizers felt that the original panel lineup was unrepresentative of the telco space, and asked for some last minute input as to what the 800lb. gorillas of the European incumbent space were doing and what issues they face, which I tried to give. Some of this can be found in the May edition of the Daiwa Global Telecom Monthly (email me at james.enck@dir.co.uk and I'll send it to you).

The event was interesting and informative, but it brought home for me the feeling that the "convergence" phenomenon is still largely comprised of a line of vertical silos, even within individual organizations, which don't seem to connect very well. For example, it was interesting to see the focus of the presentations entirely on on-demand video content as an in-home service, and I didn't hear one mention of video as a potential mobile application. This was curious, in light of the fact that services such as the one launched recently by the Norwegian Broadcasting Corporation NRK are live today (http://mobil.nrk.no), and NRK claims to have had 2,000 video clips downloaded in the first eight hours after launch. I also sensed that my comments regarding VoIP as an attractive part of a service offering might have come as a surprise to some (one executive from the content side claimed to be hearing about VoIP for the first time), though the keynote from Alessandro Petazzi of e.Biscom did seem reinforce the point, as did the experience of Norwegian FTTH player LyseTele (www.lyse.no), which has 10,000 FTTH customers and typically sees a 60% takeup rate in new service areas.

It was also interesting to see the various players in the industry struggling with ensuring that an excessive technology focus does not obscure the real challenge, which was almost universally defined as discerning what consumers really want, and above all, minimizing churn. This is clearly an area where the pay TV world and telecom match up nicely. Brian Sullivan, New Product Development head at BSkyB, strongly urged caution in attributing too much value to some of the flashier features available to the customer, and stated that the industry was deluding itself if it believed that supplying unlimited consumer choice was the key to success in the near term. He highlighted the fact that for homes subscribing to the Sky Plus PVR package, fully 60% of viewing was still of linear broadcast content (Alessandro Petazzi from e.Biscom stated that the average premium content subscriber for Fastweb views five films per month, and the online PVR storage function [five hours recording time bundled with the set-top box rental] sees use an average of 10 times per month). For Sky, the point of supplying such functionality at this stage in the game, Mr. Sullivan stated, was primarily related to competitive considerations rather than a specific revenue opportunity. Longer term, generational changes in the subscriber base might change this situation, he said, but in the 2 - 5 year time frame identified as critical by many presenters, the industry should not expect too much from fully on-demand services via complex technological solutions. Marc Schroeder, T-Online's SVP for product marketing content, remarked frankly that, from DT's perspective the company doesn't care what the customer wants - it will seek to provide whatever is required to stem churn from its traditional services, be it network PVR function, mailorder DVD rental, or both (as is the case). William Reeve of Screen Select argued passionately that technology itself was overrated so far, pointing out only half-in-jest that his DVD mailorder rental company Screen Select moves 50 terabytes (10,000 DVDs) of data per day at an average cost of less than GBP0.20 per gigabyte, just by means of the Royal Mail (this leads to a new dimension of meaning for the phrase "packet loss"). Most presenters seemed to agree that the key technology issues will be resolved over the next two years (indeed, BT engineers paid a visit to my street in SE22 this morning, and now fiber runs within 10 meters of my door), leaving market development to be decided on the basis of features, content, service and price.

Similar caution was sounded on the issue of interactive services and commerce. Fastweb has developed a number of interactive services and T-commerce functions, but the revenue generated there is insignificant, a sentiment echoed by Kevin Walsh, MD of Kingston Communications Interactive, another pioneer in the industry. He did, however, point out that positive experiences in developing services can arise from some unlikely places. Kingston has partnered with the BBC to tailor BBCi (interactive) content to the local market, forming BBCi Hull, which it regards as a differentiator and a source of stickiness. Another example is original content being produced by local schools in Hull. From a different perspective, but with a similar message, Dean Hawkins, COO of Video Networks (www.videonetworks.com), remarked about experiments the company had done on its Home Choice service, creating an interactive channel completely devoted to commercials, which has proven surprisingly popular (one viewer apparently watched the Pepperami spot 63 times), and opens up further questions about defining consumer taste and building revenue models to accomodate it. Video Networks will soon be unveiling a music download service linked in with its packaged music channels, an obvious example of how such synergies in the platform may present themselves as revenue opportunities, if the companies in question are open to them. The distinct impression I had listening to these pioneers of interactive and on-demand services was that a huge amount of research, trial and error and refinement has gone into the services they are offering today, in most cases over a period of four years.

Another theme which made me feel right at home from the telco world was the fact that technology is moving forward much faster than regulation (and also in this case licensing) regimes can handle. Dean Hawkins highlighted the grey area occupied by server-based PVR functionality in the copyright laws. Home recording for personal consumption receives special dispensation from anti-piracy laws, but defining server-based PVR functionality is problematic - is it an extension of the home recording function, or something else? The server-based PVR function is ostensibly something which can drive consumer adoption of new on-demand content services (and content owner revenues), but if the legal system complicates matters, or if the technology makes a nonsense of the law, an overhaul of the regulatory regime will be an urgent matter. The MD of research consultancy Decipher offered some interesting comments on the discontinuities facing the industry in future, predicting that new entrants to the PVR market might have radically different agendas to the traditional suppliers (indeed TiVO's strategy seems to be growing more free-wheeling, out of necessity), and that this tension coupled with the rise of more peer-to-peer functionality meant that the industry could expect content to be moving around "in a pretty alarming fashion." All of this had a familiar resonance to this listener.

So what are the takeaways for the incumbent telcos in Europe? I have identified a few key issues, and most are not terribly encouraging, based on what I saw and heard yesterday:

Market/service definition

What I heard yesterday a number of times from some very experienced people and companies in this arena was that the entrenched players themselves are not necessarily very sure of what the services are or should be. This is clearly an area where even their own experience and research seems to be of little help. This may encourage the telcos, as it is a nascent market. However, if the telcos seek to start services by replicating what the leading players have done already, then they are, at best, no further down the road to something unique.

Consumer education

Many of the presenters yesterday alluded to the need for some handholding and education in driving demand from the consumer side. LyseTele has adopted a community activist approach in proposed service areas, writing to residents and setting up community meetings to explain the FTTH triple play and build consensus for deployment. Video Networks, which is currently relaunching and seeking to double its London footprint before expanding to the next three large conurbations in the UK, has decided to deploy portable demonstration pods in shopping malls, train stations, etc., to give potential customers a hands-on education as to what the product offering is. e.Biscom revealed that 60% of its new customers come from tied specialist sales agents, who have a high level of knowledge about the product. Research just out from Ipsos-Insight claims that 72% of American adults show some interest in a "media hub" to fuse the internet with home entertainment hardware, though only 31% are familiar with the concept, and a mere 5% were determined to be "very familiar" with it. It's probably not enough for telcos to say "we do TV, please buy it," particularly as this will involve a considerable mental leap for many consumers.

Sweat equity

One of my contacts in the European cable industry put it succinctly recently: "We do this every day, full time, and have been doing it for many years. And it is still very, very hard." This was a sentiment echoed repeatedly yesterday. The most impressive examples of TV delivery via a non-cable/satellite platform - e.Biscom, Video Networks, and Kingston - have all been refining the product, content and the user interface intensively for the better part of four years. They also have an existing relationship, and framework for negotiating, with the studios and other content providers. We have seen a couple of service launches from the incumbents so far (MaLigne, Imagenio), and hear that a number of operators have RFPs in the market for video services, but the experience of the pioneers suggests a very steep learning curve in actually delivering something consumers will use.

Culture/skillset (closely linked to sweat equity)

I was lucky enough to have a briefing and demonstration at Video Networks' office a couple of weeks back, and Home Choice is truly impressive. The user interface was attractive, intuitive, and the set-top box was so compact and visually unobtrusive as to be almost invisible. If we drill down further into what makes the Video Networks story different from a telco we find some interesting things. Firstly, the company's management team has a long and credible collective experience in cable, broadband, and broadcast/content procurement. Secondly, the design of the box and software was done in-house, is proprietary (presumably licenseable to telcos looking to speed time to market), and the company has preconfigured it to accomodate MPEG4 (we are curious to see if other new entrants to the market end up with stranded boxes because of a lack of such foresight). Thirdly, with a couple of major studios as shareholders, we could argue that Video Networks has been a proving ground of sorts for the content providers, who we expect were initially concerned about quality issues associated with DSL delivery. We think this gives the company a great deal of access to the studios, as well as insight into their thinking and expectations of the VoD market, not to mention a sympathetic ear when it comes to licensing and revenue share arrangements. Fourthly, the company is small and has a free hand to bundle services and move quickly to capture new revenue streams, and we expect an IP triple play to be in place by early next year.

Damage limitation, not growth

The message that came through loud and clear from the established on-demand TV players yesterday was that the ranges of services and functions they are deploying now are about churn minimization, not necessarily startling new growth opportunities. This should serve as a warning to anyone who expects video to be a major growth driver for telcos generally, though we should stress that Europe is far from being a level playing field. As we wrote in our Global Monthly piece, in countries where the TV market is either relatively stunted (Italy, Spain), or where cable players are currently limited by issues of infrastructure (Germany) or regulatory barriers (France), there may be a case for some uplift from video-over-DSL, and notably these are markets where the operators are currently making hay while the sun shines. Contrast this with the Dutch market, where cable is near-universal, and KPN has determined for now that its DSL network is not up to the challenge, and we get a very different picture, also reflected in the price environment. The annual ARPU figure stated by e.Biscom yesterday works out at EUR76 per month (and rising), which elicited a pained gasp from the Dutch friend seated to my right, who stated, "If you come to the Dutch market with a triple play priced above EUR60, you will have your head cut off."